** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **ý** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF**

**THE  SECURITIES EXCHANGE ACT OF 1934**  | ** ** |   |
|------------|------------|-----------------------------------------------------------------------------------------------------|------------|--------|
|       |       | **For the  quarterly period ended September 30, 2004**                                              |       |   |
|       |       | **OR**                                                                                              |       |   |
|       |       |                                                                                                |       |   |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF**

**THE  SECURITIES EXCHANGE ACT OF 1934** |       |   |

 

**Commission file number 001-16047**

 

**Advanced Power Technology, Inc.**

*(Exact name of registrant asspecified in its charter)*

 

 

 

| **Delaware**                                                          | ** ** | **93-0875072**                                 |
|-----------------------------------------------------------------------|------------|------------------------------------------------|
| *(State  or other Jurisdiction of*

*Incorporation  or Organization)* | * *   | *(I.R.S.  Employer*

*Identification  Number)* |

 

**405 SW Columbia Street, Bend,Oregon 97702**

*(Address of principal executiveoffices and Zip Code)*

 

**(541) 382-8028**

*(Registrant’s telephone number)*

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to thefiling requirements for the past 90 days. Yes ý  No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act). Yes ý  No o

 

The number of shares of the Registrant’s Common Stock outstanding asNovember 1, 2004 was 10,685,800shares.

 

----

 

**ADVANCED POWER TECHNOLOGY, INC.**

**FORM 10-Q**

**TABLE OF CONTENTS**

 
| **Part I**  | **Financial  Information**                                                                              | ** ** |
|-------------|---------------------------------------------------------------------------------------------------------|------------|
|        |                                                                                                    |       |
| Item 1.     | Financial Statements:                                                                                   |       |
|        |                                                                                                    |       |
| ** **  | Consolidated Balance Sheets  as of September 30, 2004 and December 31, 2003                             |       |
|        |                                                                                                    |       |
| ** **  | Consolidated  Statements of Operations for the three and nine months ended September 30,  2004 and 2003 |       |
|        |                                                                                                    |       |
| ** **  | Consolidated  Statements of Cash Flows for the nine months ended September 30, 2004 and  2003           |       |
|        |                                                                                                    |       |
| ** **  | Notes to  Consolidated Financial Statements                                                             |       |
|        |                                                                                                    |       |
| Item  2.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations             |       |
|        |                                                                                                    |       |
| Item  3.    | Quantitative  and Qualitative Disclosure About Market Risk                                              |       |
| ** **  | ** **                                                                                              | ** ** |
| Item 4.     | Controls and Procedures                                                                                 |       |
|        |                                                                                                    |       |
|        |                                                                                                    |       |
| **Part II** | **Other Information**                                                                                   | ** ** |
|        |                                                                                                    |       |
| Item  1.    | Legal  Proceedings                                                                                      |       |
|        |                                                                                                    |       |
| Item 6.     | Exhibits                                                                                                |       |
|        |                                                                                                    |       |
| ** **  | Signature                                                                                               |       |
|        |                                                                                                    |       |
| ** **  | Exhibits                                                                                                |       |

 

2

----

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**ADVANCED POWER TECHNOLOGY, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(In thousands, except share andper share amounts)**

 
| ** **                                                                                                                                                                                    | ** ** | **September 30,**

**2004** | ** ** | **December 31,**

**2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                                    | ** ** | **(Unaudited)**                  | ** ** | ** **                      | ** ** |
|                                                                                                                                                                                          |       |                             |       |                            |       |
| **Assets**                                                                                                                                                                                    | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| Current assets:                                                                                                                                                                               |       |                             |       |                            |       |
| Cash and cash equivalents                                                                                                                                                                     |       | $                                | 10,892     |                            | $          | 11,564 |   |
| Short-term investments in available-for-sale securities                                                                                                                                       |       | 4,802                            |       | 4,000                           |       |
| Accounts receivable, net of allowance of $320 (2004) and $213 (2003)                                                                                                                          |       | 11,186                           |       | 7,564                           |       |
| Inventories, net                                                                                                                                                                              |       | 12,753                           |       | 12,382                          |       |
| Prepaid expenses and other current assets                                                                                                                                                     |       | 2,348                            |       | 2,436                           |       |
| Total current assets                                                                                                                                                                          |       | 41,981                           |       | 37,946                          |       |
|                                                                                                                                                                                          |       |                             |       |                            |       |
| Property and equipment, net of accumulated amortization and  depreciation of $16,863 (2004) and $14,417 (2003)                                                                                |       | 11,327                           |       | 11,002                          |       |
| Long-term investments in available-for-sale securities                                                                                                                                        |       | 1,000                            |       | 1,000                           |       |
| Other assets                                                                                                                                                                                  |       | 53                               |       | 174                             |       |
| Technology assets, net of accumulated amortization of $2,760 (2004)  and $1,953 (2003)                                                                                                        |       | 8,003                            |       | 8,811                           |       |
| Goodwill                                                                                                                                                                                      |       | 15,570                           |       | 15,570                          |       |
| Total assets                                                                                                                                                                                  |       | $                                | 77,934     |                            | $          | 74,503 |   |
|                                                                                                                                                                                          |       |                             |       |                            |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                                                |       |                             |       |                            |       |
| Current liabilities:                                                                                                                                                                          |       |                             |       |                            |       |
| Accounts payable                                                                                                                                                                              |       | $                                | 4,020      |                            | $          | 3,471 |   |
| Accrued expenses                                                                                                                                                                              |       | 2,577                            |       | 2,695                           |       |
| Total current liabilities                                                                                                                                                                     |       | 6,597                            |       | 6,166                           |       |
| Other long term liabilities                                                                                                                                                                   |       | 112                              |       | 127                             |       |
| Total liabilities                                                                                                                                                                             |       | 6,709                            |       | 6,293                           |       |
|                                                                                                                                                                                          |       |                             |       |                            |       |
| Commitments and contingencies                                                                                                                                                                 |       |                             |       |                            |       |
|                                                                                                                                                                                          |       |                             |       |                            |       |
| Stockholders’ equity:                                                                                                                                                                    |       |                             |       |                            |       |
| Preferred stock, par value $.001, 1,000,000 shares authorized; no  shares issued and outstanding                                                                                              |       | —                           |       | —                          |       |
| Common stock, par value $.01, 19,000,000 shares authorized;  10,802,070 issued and 10,685,220 shares outstanding in 2004; 10,579,930  shares issued and 10,463,080 shares outstanding in 2003 |       | 108                              |       | 106                             |       |
| Additional paid-in capital                                                                                                                                                                    |       | 89,127                           |       | 88,625                          |       |
| Treasury stock, at cost, 116,850 shares                                                                                                                                                       |       | (1,761                           | )          | (1,761                          | )          |
| Deferred stock compensation                                                                                                                                                                   |       | —                           |       | (21                             | )          |
| Accumulated other comprehensive income                                                                                                                                                        |       | 419                              |       | 309                             |       |
| Accumulated deficit                                                                                                                                                                           |       | (16,668                          | )          | (19,048                         | )          |
| Total stockholders’ equity                                                                                                                                                               |       | 71,225                           |       | 68,210                          |       |
| Total liabilities and stockholders’ equity                                                                                                                                               |       | $                                | 77,934     |                            | $          | 74,503 |   |

 

See accompanying notes toconsolidated financial statements.

 

3

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**ADVANCED POWER TECHNOLOGY, INC.**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(In thousands, except share andper share amounts)**

**(Unaudited)**

 
| ** **                                                                                 | ** ** | **Three  Months Ended**

**September  30,** | ** ** | **Nine  Months Ended**

**September  30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2004**                                    | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                       |       |                                        |       |                                       |       |   |   |   |   |
| Revenues, net                                                                              |       | $                                           | 18,660     |                                       | $          | 12,708 |   | $ | 51,814 |   | $ | 36,354 |   |
|                                                                                       |       |                                        |       |                                       |       |   |   |   |   |
| Cost of goods sold                                                                         |       | 12,079                                      |       | 8,363                                      |       | 32,361 |   | 23,892 |   |
| Amortization of technology rights and other charges                                        |       | 269                                         |       | 278                                        |       | 817 |   | 842 |   |
| Total cost of goods sold                                                                   |       | 12,348                                      |       | 8,641                                      |       | 33,178 |   | 24,734 |   |
|                                                                                       |       |                                        |       |                                       |       |   |   |   |   |
| Gross profit                                                                               |       | 6,312                                       |       | 4,067                                      |       | 18,636 |   | 11,620 |   |
|                                                                                       |       |                                        |       |                                       |       |   |   |   |   |
| Operating expenses:                                                                        |       |                                        |       |                                       |       |   |   |   |   |
| Research and development                                                                   |       | 903                                         |       | 550                                        |       | 2,573 |   | 2,051 |   |
| Selling, general and administrative                                                        |       | 3,857                                       |       | 3,672                                      |       | 13,097 |   | 11,066 |   |
| Restructuring charges                                                                      |       | 38                                          |       | —                                     |       | 359 |   | 240 |   |
| In-process research and development charges                                                |       | 170                                         |       | —                                     |       | 170 |   | — |   |
| Total operating expenses                                                                   |       | 4,968                                       |       | 4,222                                      |       | 16,199 |   | 13,357 |   |
|                                                                                       |       |                                        |       |                                       |       |   |   |   |   |
| Income (loss) from operations                                                              |       | 1,344                                       |       | (155                                       | )          | 2,437 |   | (1,737 | ) |
|                                                                                       |       |                                        |       |                                       |       |   |   |   |   |
| Interest income, net                                                                       |       | 66                                          |       | 56                                         |       | 147 |   | 164 |   |
| Other income (expense), net                                                                |       | (153                                        | )          | 16                                         |       | (147 | ) | (118 | ) |
|                                                                                       |       |                                        |       |                                       |       |   |   |   |   |
| Income (loss) before income tax expense (benefit)                                          |       | 1,257                                       |       | (83                                        | )          | 2,437 |   | (1,691 | ) |
| Income tax expense (benefit)                                                               |       | 29                                          |       | 255                                        |       | 57 |   | (225 | ) |
| Net income (loss)                                                                          |       | $                                           | 1,228      |                                       | $          | (338 | ) | $ | 2,380 |   | $ | (1,466 | ) |
|                                                                                       |       |                                        |       |                                       |       |   |   |   |   |
| Net income (loss) per share:                                                               |       |                                        |       |                                       |       |   |   |   |   |
| Basic                                                                                      |       | $                                           | 0.11       |                                       | $          | (0.03 | ) | $ | 0.22 |   | $ | (0.14 | ) |
| Diluted                                                                                    |       | 0.11                                        |       | (0.03                                      | )          | 0.21 |   | (0.14 | ) |
| Weighted average number of shares used in the computation of net  income (loss) per share: |       |                                        |       |                                       |       |   |   |   |   |
| Basic                                                                                      |       | 10,682                                      |       | 10,413                                     |       | 10,598 |   | 10,406 |   |
| Diluted                                                                                    |       | 11,170                                      |       | 10,413                                     |       | 11,215 |   | 10,406 |   |

 

See accompanying notes toconsolidated financial statements.

 

4

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**ADVANCED POWER TECHNOLOGY, INC.**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | **Nine  Months Ended**

**September  30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | **2004**                                   | ** ** | **2003** | ** ** |
| Cash flows from operating activities:                                                                                                                                                                                                                                                                                                                                                                                                       |       |                                       |       |   |   |
| Net income (loss)                                                                                                                                                                                                                                                                                                                                                                                                                           |       | $                                          | 2,380      |   | $ | (1,466 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by  operating activities:                                                                                                                                                                                                                                                                                                                                                   |       |                                       |       |   |   |
| Depreciation                                                                                                                                                                                                                                                                                                                                                                                                                                |       | 2,448                                      |       | 2,316 |   |
| Amortization of intangible assets                                                                                                                                                                                                                                                                                                                                                                                                           |       | 807                                        |       | 807 |   |
| Inventory adjustments                                                                                                                                                                                                                                                                                                                                                                                                                       |       | 547                                        |       | 175 |   |
| In-process research and development charges                                                                                                                                                                                                                                                                                                                                                                                                 |       | 170                                        |       | — |   |
| Amortization of deferred stock compensation                                                                                                                                                                                                                                                                                                                                                                                                 |       | 21                                         |       | 121 |   |
| Amortization of investment premium                                                                                                                                                                                                                                                                                                                                                                                                          |       | 4                                          |       | 14 |   |
| Deferred gain on sale-leaseback                                                                                                                                                                                                                                                                                                                                                                                                             |       | (13                                        | )          | (13 | ) |
| Loss on disposal of equipment                                                                                                                                                                                                                                                                                                                                                                                                               |       | 2                                          |       | — |   |
| Changes in operating assets and liabilities:                                                                                                                                                                                                                                                                                                                                                                                                |       |                                       |       |   |   |
| Accounts receivable                                                                                                                                                                                                                                                                                                                                                                                                                         |       | (3,629                                     | )          | (1,115 | ) |
| Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                 |       | (928                                       | )          | (528 | ) |
| Prepaid expenses and other assets                                                                                                                                                                                                                                                                                                                                                                                                           |       | 209                                        |       | 164 |   |
| Accounts payable and accrued expenses                                                                                                                                                                                                                                                                                                                                                                                                       |       | 573                                        |       | 332 |   |
| Net cash provided by operating activities                                                                                                                                                                                                                                                                                                                                                                                                   |       | 2,591                                      |       | 807 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                                       |       |   |   |
| Cash flows from investing activities:                                                                                                                                                                                                                                                                                                                                                                                                       |       |                                       |       |   |   |
| Purchases of available-for-sale securities                                                                                                                                                                                                                                                                                                                                                                                                  |       | (1,010                                     | )          | (2,000 | ) |
| Proceeds from sale of available-for-sale securities                                                                                                                                                                                                                                                                                                                                                                                         |       | 200                                        |       | 6,843 |   |
| Acquisitions, net of cash acquired                                                                                                                                                                                                                                                                                                                                                                                                          |       | (175                                       | )          | — |   |
| Proceeds from sale of property and equipment                                                                                                                                                                                                                                                                                                                                                                                                |       | —                                     |       | — |   |
| Purchase of property and equipment                                                                                                                                                                                                                                                                                                                                                                                                          |       | (2,772                                     | )          | (1,791 | ) |
| Net cash (used) provided by investing activities                                                                                                                                                                                                                                                                                                                                                                                            |       | (3,757                                     | )          | 3,052 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                                       |       |   |   |
| Cash flows from financing activities:                                                                                                                                                                                                                                                                                                                                                                                                       |       |                                       |       |   |   |
| Payments on capital lease obligations                                                                                                                                                                                                                                                                                                                                                                                                       |       | (5                                         | )          | (57 | ) |
| Proceeds from exercise of stock options                                                                                                                                                                                                                                                                                                                                                                                                     |       | 504                                        |       | 56 |   |
| Net cash (used) provided by financing activities                                                                                                                                                                                                                                                                                                                                                                                            |       | 499                                        |       | (1 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                                       |       |   |   |
| Effects of exchange rate changes on cash                                                                                                                                                                                                                                                                                                                                                                                                    |       | (5                                         | )          | (5 | ) |
| Net change in cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                     |       | (672                                       | )          | 3,853 |   |
| Cash and cash equivalents at beginning of period                                                                                                                                                                                                                                                                                                                                                                                            |       | 11,564                                     |       | 6,708 |   |
| Cash and cash equivalents at end of period                                                                                                                                                                                                                                                                                                                                                                                                  |       | $                                          | 10,892     |   | $ | 10,561 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                                       |       |   |   |
| Supplemental disclosure of cash flow information:                                                                                                                                                                                                                                                                                                                                                                                           |       |                                       |       |   |   |
| Cash received (paid) during the period for: Interest                                                                                                                                                                                                                                                                                                                                                                                        |       | $                                          | (10        | ) | $ | (24 | ) |
|                                                                      Income  taxes |       | (91                                        | )          | 199 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                                       |       |   |   |
| Supplemental disclosure of noncash activities:                                                                                                                                                                                                                                                                                                                                                                                              |       |                                       |       |   |   |
| Unrealized loss on short-term and long-term investments                                                                                                                                                                                                                                                                                                                                                                                     |       | $                                          | (2         | ) | $ | (3 | ) |

 

Seeaccompanying notes to consolidated financial statements.

 

5

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**ADVANCED POWER TECHNOLOGY, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(In thousands, except share andper share amounts)**

**(Unaudited)**

 

**Note 1. Basis of Presentation**

 

The accompanying unaudited consolidated financialstatements include normal recurring adjustments necessary for a fairpresentation of Advanced Power Technology, Inc.’s (APT) interim results. Theconsolidated financial statements and notes in this Form 10-Q are presented aspermitted by Regulation S-X, and as such, they do not contain certaininformation included in APT’s 2003 annual consolidated financial statements andnotes. This Form 10-Q should be read in conjunction with APT’s consolidatedfinancial statements and notes included in its Annual Report on Form 10-K forthe year ended December 31, 2003. The financial information as of December 31,2003 is derived from the audited consolidated financial statements as filedwith APT’s Annual Report on Form 10-K for the year ended December 31, 2003. Theresults of operations for the three and nine months ended September 30, 2004are not necessarily indicative of the results expected for the entire fiscalyear ending December 31, 2004.

 

APT’s financial quarters are 13 week periods. Thethird quarter of 2004 ended on October 3, 2004 and the third quarter of 2003ended on September 28. For convenience, the third quarter of 2004 and 2003 areboth shown as ended on September 30.

 

**Note 2. Summary of Significant Accounting Policies**

 

***(a)           Sales Returns andAllowances***

 

The balances and changes in reservefor sales allowances, warranties and returns for the three and nine monthsended September 30, 2004 and 2003 are as follows:

 
| ** **                         | ** ** | **Three  Months Ended**

**September  30,** | ** ** | **Nine  Months Ended**

**September  30,** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                         | ** ** | **2004**                                    | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|                               |       |                                        |       |                                       |       |   |   |   |   |
| Balance — beginning of period |       | $                                           | 523        |                                       | $          | 375 |   | $ | 431 |   | $ | 351 |   |
| Provisions                         |       | 257                                         |       | 235                                        |       | 976 |   | 816 |   |
| Charge offs                        |       | (312                                        | )          | (317                                       | )          | (939 | ) | (874 | ) |
| Balance — end of period       |       | $                                           | 468        |                                       | $          | 293 |   | $ | 468 |   | $ | 293 |   |

 

 

***(b)           Stock-BasedCompensation***

 

APT has elected to continue toapply the prescribed accounting in Opinion 25 and provide the requireddisclosures per SFAS 123 and SFAS 148. APT accounts for equity instrumentsissued to non-employees in accordance with the provisions of SFAS 123 andEmerging Issues Task Force consensus on Issue No. 96-18, “Accounting for EquityInstruments that are Issued to Other than Employees, for Acquiring or inConjunction with Selling Goods or Services.”

 

Had APT determined compensationcost based on the fair value at the grant date for its stock options underSFAS 123, APT’s net income (loss) would have been the pro forma amountsindicated in the table below:

 

6

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| ** **                                                                                | ** ** | **Three  Months Ended**

**September  30,** | ** ** | **Nine  Months Ended**

**September  30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                | ** ** | **2004**                                    | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                      |       |                                        |       |                                       |       |   |   |   |   |
| Net income (loss), as reported                                                            |       | $                                           | 1,228      |                                       | $          | (338 | ) | $ | 2,380 |   | $ | (1,466 | ) |
| Add: Stock based compensation included in reported net income (loss)                      |       | —                                      |       | 33                                         |       | 21 |   | 121 |   |
| Deduct: Stock based compensation determined under fair value based  method for all awards |       | (272                                        | )          | (465                                       | )          | (732 | ) | (1,344 | ) |
| Pro forma net income (loss)                                                               |       | $                                           | 956        |                                       | $          | (770 | ) | $ | 1,669 |   | $ | (2,689 | ) |
|                                                                                      |       |                                        |       |                                       |       |   |   |   |   |
| Income (loss) per share:                                                                  |       |                                        |       |                                       |       |   |   |   |   |
| Basic — as reported                                                                  |       | $                                           | 0.11       |                                       | $          | (0.03 | ) | $ | 0.22 |   | $ | (0.14 | ) |
| Basic — pro forma                                                                    |       | 0.09                                        |       | (0.07                                      | )          | 0.16 |   | (0.26 | ) |
|                                                                                      |       |                                        |       |                                       |       |   |   |   |   |
| Diluted — as reported                                                                |       | $                                           | 0.11       |                                       | $          | (0.03 | ) | $ | 0.21 |   | $ | (0.14 | ) |
| Diluted — pro forma                                                                  |       | 0.09                                        |       | (0.07                                      | )          | 0.15 |   | (0.26 | ) |

 

The effects of applying SFAS 123 in this pro formadisclosure are not indicative of future amounts and additional awards areanticipated in future years. The fair value of the compensation costs reflectedin the above pro forma amounts was determined using the Black-Scholes optionpricing model and the weighted average assumptions as follows:

 
| ** **              | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
|                    |       |     |       |     |       |
| Risk-free interest rate |       | 3.0-3.7  | %          | 2.6-3.2  | %          |
| Expected dividend yield |       | 0        | %          | 0        | %          |
| Expected life           |       | 5  years |       | 5  years |       |
| Volatility              |       | 100      | %          | 100      | %          |

 

***(c)           Net Income (Loss)Per Share***

 

Basic net income (loss) per share is computed usingthe weighted average number of shares of common stock outstanding for theperiod. Diluted net income per share is computed using the weighted averagenumber of shares of common stock and dilutive potential common shares relatedto stock options and warrants outstanding during the period. Anti-dilutivepotential common shares are excluded from the diluted net income sharecalculation. Dilutive net loss per share excludes all potential common sharesfrom the calculation as the impact would be anti-dilutive. Incremental dilutiveshares included in the calculation of diluted net income per share andincremental anti-dilutive shares that were excluded from the calculation ofdiluted net income per share for the three and nine months ended September 30,2004 and 2003 are summarized in the following table:

 
| ** **                                                                          | ** ** | **Three  Months Ended**

**September  30,** | ** ** | **Nine  Months Ended**

**September  30,** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                          | ** ** | **2004**                                    | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                |       |                                        |       |                                       |       |   |   |   |   |
| Incremental dilutive shares included in diluted net income per share  calculation   |       | 488,000                                     |       | —                                     |       | 617,000 |   | — |   |
| Anti-dilutive shares excluded from diluted net income (loss) per  share calculation |       | 632,000                                     |       | 1,266,000                                  |       | 545,000 |   | 1,283,000 |   |

 

7

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***(d)           Goodwill andIntangibles***

 

APT values goodwill andintangible assets in accordance with SFAS 142, “Goodwill and Other IntangibleAssets.” The costs of internally developed intangible assets are expensed asincurred. The costs of acquired intangible assets are recorded at fair value atacquisition. Intangible assets with finite lives are amortized using thestraight-line method over their estimated useful lives, estimated at ten years,and evaluated for impairment in accordance with SFAS 144. Amortization oftechnology rights was approximately $269 in the third quarters of 2004 and 2003,and $807 in the first nine months of 2004 and 2003. Amortization of technology rights will be $1,076 forthe years ending December 31, 2004, 2005, 2006, 2007 and 2008.

 

***(e)            Income Taxes***

 

Income taxes are accounted for under the asset andliability method. Under the asset and liability method, deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled. The effect on deferred tax assets and liabilities of achange in tax rates is recognized in income in the period that includes theenactment date. A valuation allowance is established when necessary to reducedeferred tax assets to the amount expected to be realized. During the fourthquarter of 2003, the Company determined that a full valuation allowance shouldbe recorded against its net deferred tax assets. While the Company has sufficient net operating loss carry-forwards (NOL’s)to offset federal taxable income for regular tax purposes, the Company’s use ofits NOL’s for alternative minimum tax (AMT) purposes are limited to 90% of itsAMT income (AMTI). Therefore, the Company expects to pay AMT of approximately20% on the remaining AMTI, resulting in an approximate effective tax rate of 2%for the first nine months of 2004. However, at such time the Company is able todetermine if it is more likely than not that it will be able to utilize its netoperating losses, the reserve against the net deferred tax asset would bereversed.

 

**Note 3. Acquisitions**

 

During the third quarter of 2004, APT acquired theassets, including prototype inventories, equipment, patents, and otherintellectual property from a development stage business. The acquisition pricewas $175, paid in cash. The purchase price was allocated to in-process researchand development (IPR&D) of $170 and fixed assets of $5. The value assignedto IPR&D related to research projects for which technological feasibilityhad not yet been established and for which there was no other feasible alternativeuse for the technology. The value of the IPR&D was determined based on theconsideration paid as the most reliable measure. The acquisition was made toenhance APT’s product development capability.

 

**Note 4. Restructuring Charges**

 

Restructuring costs are accountedfor in accordance with SFAS 146, “Accounting for Costs Associated with Exit orDisposal Activities.” A liability for a cost associated with an exit ordisposal activity is recognized and measured at fair value in the period theliability is incurred, except for liabilities related to ongoing servicerequirements which are recognized over the service period. All otherrestructuring charges are directly expensed in the period they are paid.

 

As part of management’s costreduction efforts, the Company announced in November of 2003 restructuringactions intended to improve manufacturing efficiencies and lower administrativecosts. The actions include consolidation of certain administrative functions,rationalization of internal and external assembly and test manufacturing, andthe reduction of rent expense through the purchase and resale of one of the twobuildings currently occupied by the Company’s Santa Clara, Californiasubsidiary. These announced actions were in addition to previously disclosedplans to consolidate the Company’s wafer fabrication plant in Montgomeryville,Pennsylvania to Bend, Oregon. Total restructuring related charges recognized in2003 were $645, of which $240 was recognized in the first quarter of 2003 and$405 was recognized in the fourth quarter of 2003.

 

The total severance relatedcharge recognized in 2003 was $295, which was recognized as $240 and $55 in thefirst and fourth quarters of 2003, respectively. The severance charge relatedto already separated personnel and

 

8

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personnel costs associated with benefits expectedto be paid upon completion of certain eligible transfer activities. The building purchase is reported as anasset held for sale and is being marketed for sale as APT no longer requiresthe space. In accordance with SFAS 144, an asset held for sale is carried atestimated fair value. As such, APT recorded an impairment charge for thebuilding in the fourth quarter of 2003 of approximately $350. Fair value wasestimated based on comparable sales data of similar commercial space in thearea. The net carrying value of the building as of September 30, 2004 wasapproximately $1 million and is included as a component of other currentassets.

 

During the first nine months of 2004, an additional$359 was recognized for restructuring related charges, of which $206 wasrecognized in the first quarter of 2004, $115 in the second quarter of 2004,and $38 in the third quarter of 2004. The total severance related charge recognizedin 2004 was $103, which was recognized as $65 and $38 in the first and secondquarters of 2004, respectively. Theseverance charge related to already separated personnel and personnel costsassociated with benefits expected to be paid upon completion of certaineligible transfer activities. Additional restructuring costs of $256 associatedwith costs to exit certain production activities were also recognized in thefirst nine months of 2004, of which $141 was recognized in the first quarter of2004, $77 were recognized in the second quarter of 2004, and $38 was recognizedin the third quarter of 2004. These charges relate to accelerated depreciationon certain production related equipment to be abandoned after shutdown andcontractual closing costs.

 

The changes in the reserve forrestructuring balance for the three and nine months ended September 30, 2004and 2003 are shown in the table below. Certain of the restructuring chargeswere expensed as incurred and therefore are not included in the provision.

 
|                               |   | **Three Months Ended**

**September 30,** |   | **Nine Months Ended**

**September 30,** |   |
|------------------------------------|--------|-------------------------------------------|--------|------------------------------------------|--------|
|                               |   | **2004**                                  |   | **2003**                                 |   | **2004** |   | **2003** |   |
| Balance — beginning of period |   | $                                         | 123    |                                     | $      | 123 |   | $ | 178 |   | $ | — |   |
| Provision                          |   | 38                                        |   | —                                   |   | 181 |   | 240 |   |
| Payments                           |   | (74                                       | )      | —                                   |   | (272 | ) | (117 | ) |
| Balance — end of period       |   | $                                         | 87     |                                     | $      | 123 |   | $ | 87 |   | $ | 123 |   |
|                               |   |                                      |   |                                     |   |   |   |   |   |
| Provision                          |   | $                                         | 38     |                                     | $      | — |   | $ | 181 |   | $ | 240 |   |
| Direct expenses                    |   | —                                    |   | —                                   |   | 23 |   | — |   |
| Non-cash charges                   |   | —                                    |   | —                                   |   | 155 |   | — |   |
| Total restructuring charges        |   | $                                         | 38     |                                     | $      | — |   | $ | 359 |   | $ | 240 |   |

 

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**Note 5. Comprehensive Income (loss)**

 

Comprehensive income (loss) is the total of net income(loss) and all other non-owner changes in equity. Comprehensive income (loss)includes foreign currency translations and unrealized gains and losses frominvestments, as presented in the following table.

 
| ** **                                       | ** ** | **Three Months Ended**

**September 30,** | ** ** | **Nine Months Ended**

**September 30,** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                       | ** ** | **2004**                                  | ** ** | **2003**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                             |       |                                      |       |                                     |       |   |   |   |   |
| Net income (loss)                                |       | $                                         | 1,228      |                                     | $          | (338 | ) | $ | 2,380 |   | $ | (1,466 | ) |
|                                             |       |                                      |       |                                     |       |   |   |   |   |
| Other comprehensive income (loss):               |       |                                      |       |                                     |       |   |   |   |   |
| Unrealized loss on available for sale securities |       | —                                    |       | (1                                       | )          | (2 | ) | (3 | ) |
| Foreign currency translation adjustment          |       | 2                                         |       | (3                                       | )          | 112 |   | 71 |   |
| Comprehensive income (loss)                      |       | $                                         | 1,230      |                                     | $          | (342 | ) | $ | 2,490 |   | $ | (1,398 | ) |

 

**Note 6. Inventories, net**

 
| *** ***      | ** ** | **September 30,**

**2004** | ** ** | **December 31,**

**2003** | ** ** |
|-------------------|------------|----------------------------------|------------|---------------------------------|------------|
|              |       |                             |       |                            |       |
| Raw materials     |       | $                                | 3,456      |                            | $          | 3,005 |   |
| Work in process   |       | 6,949                            |       | 6,796                           |       |
| Finished goods    |       | 4,050                            |       | 4,617                           |       |
|              |       | 14,455                           |       | 14,418                          |       |
| Valuation reserve |       | (1,702                           | )          | (2,036                          | )          |
| Inventories, net  |       | $                                | 12,753     |                            | $          | 12,382 |   |

 

**Note 7. Segment Information**

 

APT operates in one segment and is engaged in themanufacture and marketing of high-performance power semiconductors and modulesfor switching and RF applications. Overall,our revenues by geographic area for the third quarter of 2004 were 64.5% inNorth America, 18.2% in Europe and 17.3% in Asia, compared to 66.1% in NorthAmerica, 17.8% in Europe, and 16.1% in Asia during the third quarter of 2003.Our revenues by geographic area for the first nine months of 2004 were 62.9% inNorth America, 16.4% in Europe, and 20.7% in Asia, compared to 65.8% in NorthAmerica, 19.9% in Europe, and 14.3% in Asia in the first nine months of 2003.We allocated revenue geographically based on the location to which we ship ourproducts.

 

**Note 8. Commitments and Contingencies**

 

From time to time the Company isinvolved in various legal matters that arise out of the ordinary conduct of ourbusiness, including those related to litigation over intellectual propertyrights, commercial transactions, contracts, product liability, environmental,safety and health, and employment matters. The Company is not currentlyinvolved in any legal proceedings. The Company accrues loss contingencies inconnection with its litigation when it is probable that a loss has occurred andthe amount of the loss can be reasonably estimated.

 

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

This discussion and analysis is intended to be read inconjunction with Management’s Discussion and Analysis of Financial Conditionand Results of Operations set forth in our Annual Report on Form 10-K for theyear ended December 31, 2003.

 

**Forward-looking Statements and Risk Factors AffectingBusiness and Results of Operations**

 

All statements and trend analyses contained in thisitem and elsewhere in this report on Form 10-Q relative to the futureconstitute “forward-looking” statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. Forward-statements are subject to thebusiness and economic risks faced by us and our actual results of operationsmay differ materially from those contained in the forward-looking statements.In addition, results of operations for the periods discussed below should notbe considered indicative of the results to be expected in any future period andfluctuations in operating results might result in fluctuations in the marketprice of our common stock. Our quarterly and annual operating results may varysignificantly depending on many factors, including but not limited to theability of subcontractors and key vendors to meet their delivery commitments;unfavorable changes in industry and competitive conditions; our mix of productshipments; the accuracy of our customers’ forecasts; the effectiveness of ourefforts to control and reduce costs; and other risks detailed in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations - RiskFactors Affecting Business and Results of Operations” in our Annual Report onForm 10-K for the year ended December 31, 2003, filed with the Securities andExchange Commission.

 

**Business Overview**

 

We are a leading designer, manufacturer and marketerof high-performance RF and switching power semiconductors. Power semiconductorsmanage and regulate electrical power by converting electricity into a formrequired by electrical and electronic products. Our power semiconductorsincrease system efficiency and reliability, permit the design of more compactend products and improve system features and functionality. We primarily focuson high-power, high-speed devices that dissipate at least several hundred wattsof power and require operating frequencies greater than 20 kHz, or 20,000 cyclesper second. In particular, we continue to strengthen our portfolio of RFproducts that operate at frequencies ranging from 1 MHz to 6 GHz.

 

In 2002, we acquired GHz Technology and the productlines and certain assets of Microsemi RF Products, a wholly owned subsidiary ofMicrosemi Corporation, to help us further penetrate the markets for RF powersemiconductors. We believe that these acquisitions have positioned us as aleading supplier of RF power transistors for avionics and radar. They alsoadded valuable technology and substantial engineering, manufacturing andmarketing capabilities. These acquisitions are part of our ongoing strategy toexpand our product and technology portfolio in the RF power arena through bothinternal development and acquisitions. On average, our RF power productsprovide higher gross margins than switching products, but also require a higherlevel of engineering support.

 

We sell our products in North America, Europe, andAsia primarily pursuant to customer purchase orders. Overall, our revenues bygeographic area for the third quarter of 2004 were 64.5% in North America,18.2% in Europe and 17.3% in Asia, compared to 66.1% in North America, 17.8% inEurope, and 16.1% in Asia during the third quarter of 2003. Our revenues by geographicarea for the first nine months of 2004 were 62.9% in North America, 16.4% inEurope, and 20.7% in Asia, compared to 65.8% in North America, 19.9% in Europe,and 14.3% in Asia in the first nine months of 2003. We allocate revenuegeographically based on the location to which we ship our products.

 

We sell through a network of independent salesrepresentatives and distributors. We have operations in Bend, Oregon, SantaClara, California, Montgomeryville, Pennsylvania, and Bordeaux, France. Eachsite has production, research and development and administrative activities. Wealso make use of subcontract manufacturers for the fabrication of our wafersand for assembly and test operations.

 

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**Our Markets**

 

We operate on a worldwide basis. As such, ouroperations are affected by global, regional and industry-specific economic andpolitical factors. The markets for our products are diversified, and includemilitary and aerospace, semiconductor capital equipment, medical andindustrial, and communications and data processing.

 

We believe demand is being driven by the emergence ofnew applications for higher power, higher frequency semiconductors that moreprecisely manage power, and also by the need to increase performance andimprove power quality for existing applications. In particular, demand in ourtarget markets is driven by the cyclical changes in the semiconductor capitalequipment market and the communications and data processing market, as well asdemand for complex medical equipment and military and commercial radarequipment. We believe demand is also being driven by the need for moreefficient energy use resulting from rising energy costs, government mandatesand environmental concerns.

 

**Critical Accounting Policies andEstimates**

 

The discussion and analysis of our financial conditionand results of operations are based upon our consolidated financial statements,which have been prepared in accordance with generally accepted accountingprinciples in the United States of America. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosuresof contingent assets and liabilities. On an on-going basis, we evaluate ourestimates, including those related to product returns and warranty obligations,allowance for doubtful accounts, excess and obsolete inventories, income taxes,valuation of goodwill and intangible assets with indefinite lives, valuation oflong-lived assets, and contingencies and litigation. We base our estimates onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities and thetiming of revenue recognition that are not readily apparent from other sources.Actual results may differ from these estimates under different assumptions orconditions.

 

We believe the following critical accounting policiesinvolve more significant judgments and estimates used in the preparation of ourconsolidated financial statements.

 

***RevenueRecognition, Sales Allowances, Returns and Warranty Obligations***

 

Product revenue is recognized upon shipment ofproduct. In general, we provide for a one-year repair or replacement warrantyon our products. We use independent distributors to sell some of our products.Distributors can return a contractually agreed upon percentage of the dollarvalue of products purchased during the prior six months. In addition, we may ona case-by-case basis grant to distributors certain price protections onpurchased products. Upon shipment, we provide an allowance for the estimatedcost that may be incurred for product warranty and sales returns based onhistorical experience and contractual requirements.

 

While we engage in extensive product quality programsand processes, including actively monitoring and evaluating the quality of ourcomponent suppliers, our warranty obligation is affected by productnon-conformance rates, material usage and service delivery costs incurred incorrecting a product non-conformance. Should actual product non-conformancerates, material usage, service delivery costs, or distributor returns differfrom our estimates, revisions to the estimated warranty liability would berequired.

 

***Allowance forDoubtful Accounts***

 

We maintain an allowance for doubtful accounts forestimated losses resulting from the inability of our customers to make requiredpayments. We regularly review the adequacy of the allowance after consideringthe size of the accounts receivable balance, historical bad debts, the customer’sexpected ability to pay and our collection history with each customer. We reviewsignificant individual accounts that are past due to determine whether anallowance should be made based on these factors. If the financial condition ofour customers were to deteriorate, resulting in an impairment of their abilityto make payments, additional allowances may be required.

 

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***Excess and ObsoleteInventories***

 

Inventories are stated at the lower of standard cost(approximates actual cost on a first-in, first-out basis) or market (netrealizable value). We adjust inventory costs for estimated unmarketable(excess) or obsolete inventory to estimated net realizable value based uponassumptions about future demand and market conditions. We establish reservesfor excess component order cancellation costs based on estimated net realizablevalue of the components purchased and any additional cancellation charges. Weevaluate historical usage of the product, current customer demand, purchasecommitments and forecasted usage of the product. If actual market conditionsare less favorable than those projected by management, additional adjustmentsor reserves may be required.

 

***Income Taxes***

 

We record a valuation allowance to reduce our deferredtax assets to the amount that is more likely than not to be realized. Weconsider future taxable income and ongoing prudent and feasible tax planningstrategies in assessing the need for the valuation allowance. In the event wewere to determine that we would be able to realize our deferred tax assets inthe future in excess of our net recorded amount, an adjustment to decrease thevaluation allowance would increase income in the period such determination wasmade. Should we determine that we would not be able to realize all or part ofour net deferred tax asset in the future, an adjustment to increase thevaluation allowance would be charged to income in the period such determinationwas made. As of September 30, 2004, we had a full valuation allowance recordedagainst our net deferred tax assets.

 

***Valuation of Goodwilland Intangible Assets with Indefinite Lives***

 

We value goodwill and intangible assets withindefinite lives in accordance with Statement of Financial Accounting StandardsNo. (SFAS) 142 ‘‘Goodwill and Other Intangible Assets.’’ Currently we carry agoodwill balance in connection with previous acquisitions, but have no otherintangible assets with indefinite lives. We annually review goodwill forimpairment and when events or circumstances indicate the carrying value of theasset might exceed its current fair value. We determine fair value usingdiscounted cash flow analysis and other acceptable valuation methodologies suchas market multiples and comparable transactions. This requires us to makeassumptions and estimates regarding industry economic factors and futureprofitability. It is our policy to conduct impairment testing based on our mostcurrent business plans, which reflect changes we anticipate in the economy andindustry. If actual results are not consistent with our assumptions andjudgments, we could be exposed to a material impairment charge as a result ofwriting down the carrying value of goodwill.

 

***Valuation ofLong-Lived Assets***

 

We value long-lived assets, including intangibleassets with finite lives, in accordance with SFAS 144 ‘‘Accounting for theImpairment or Disposal of Long-Lived Assets.’’ We evaluate our long-livedassets for impairment whenever events or changes in circumstances indicate thatthe carrying amount may not be recoverable. We determine the potentialimpairment using undiscounted cash flow analysis, which requires us to makecertain assumptions and estimates regarding industry economic factors andfuture profitability. It is our policy to conduct impairment testing based onour most current business plans, which reflect changes we anticipate in theeconomy and industry. If actual results are not consistent with our assumptionsand judgments, we could be exposed to a material impairment charge as a resultof writing down the carrying value of long-lived assets. If the asset group isdetermined to be unable to recover the carrying amount of its assets, thenintangible assets are written down first, followed by the other long-livedassets of the operation, to fair value. Fair value is determined based ondiscounted cash flows or appraised values, depending on the nature of theassets. Long-lived assets considered held for sale are valued at the lower ofhistorical cost or fair value less costs to sell. Such assets are notdepreciated while so classified.

 

***Contingencies andLitigation***

 

We are subject to the possibility of various loss contingencies arisingin the ordinary course of business. We consider the likelihood of loss orimpairment of an asset or the incurrence of a liability, as well as our abilityto reasonably estimate the amount of loss in determining loss contingencies. Anestimated loss contingency is accrued when it is probable that an asset hasbeen impaired or a liability has been incurred and the amount of loss can be

 

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reasonably estimated. We regularly evaluate current informationavailable to us to determine whether such accruals should be adjusted.

 

**Results of Operations**

 

The following table presents ourconsolidated statement of operations data for the periods indicated as apercentage of net revenue:

 
| ** **                                          | ** ** | **Three Months Ended**

**September 30,** | ** ** | **Nine Months Ended**

**September 30, 2004** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                          | ** ** | **2004**                                  | ** ** | **2003**                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                |       |                                      |       |                                          |       |   |   |   |   |
| Revenues, net                                       |       | 100.0                                     | %          | 100.0                                         | %          | 100.0 | % | 100.0 | % |
| Cost of goods sold                                  |       | 64.7                                      |       | 65.8                                          |       | 62.4 |   | 65.7 |   |
| Amortization of technology rights and other charges |       | 1.5                                       |       | 2.2                                           |       | 1.6 |   | 2.3 |   |
| Total cost of goods sold                            |       | 66.2                                      |       | 68.0                                          |       | 64.0 |   | 68.0 |   |
|                                                |       |                                      |       |                                          |       |   |   |   |   |
| Gross profit                                        |       | 33.8                                      |       | 32.0                                          |       | 36.0 |   | 32.0 |   |
| Operating expenses:                                 |       |                                      |       |                                          |       |   |   |   |   |
| Research and development                            |       | 4.8                                       |       | 4.3                                           |       | 5.0 |   | 5.6 |   |
| Selling, general and administrative                 |       | 20.7                                      |       | 28.9                                          |       | 25.3 |   | 30.4 |   |
| Restructuring charges                               |       | 0.2                                       |       | —                                        |       | 0.7 |   | 0.7 |   |
| In-process research and development charges         |       | 0.9                                       |       | —                                        |       | 0.3 |   | — |   |
| Total operating expenses                            |       | 26.6                                      |       | 33.2                                          |       | 31.3 |   | 36.7 |   |
| Income (loss) from operations                       |       | 7.2                                       |       | (1.2                                          | )          | 4.7 |   | (4.7 | ) |
| Interest and other income (expense), net            |       | (0.5                                      | )          | 0.5                                           |       | — |   | 0.1 |   |
| Income (loss) before income tax benefit             |       | 6.7                                       |       | (0.7                                          | )          | 4.7 |   | (4.6 | ) |
| Income tax expense (benefit)                        |       | 0.1                                       |       | 2.0                                           |       | 0.1 |   | (0.6 | ) |
| Net income (loss)                                   |       | 6.6                                       | %          | (2.7                                          | )%         | 4.6 | % | (4.0 | )% |

 

*Revenues.* Revenues for thethird quarter of 2004 were $18.7 million, up 46.8% from $12.7 million in thethird quarter of 2003, and sequentially up 3.3% from $18.1 million in thesecond quarter of 2004, with both increases attributable to higher volumeshipments. The increase in revenues over the prior year quarter is attributableto broad increased demand in each of the end markets we serve. The increases inrevenues over the prior year quarter in each of the markets we serve were:communications and data processing 45.2%; industrial and medical 43.2%;semiconductor capital equipment 101.3%; and military and aerospace 22.8%.

 

Revenues for the first ninemonths of 2004 were $51.8 million, up 42.5% from $36.4 million in the firstnine months of 2003. The increase in 2004 over 2003 was driven by highervolumes and strong demand across all of the markets we serve, with thesemiconductor capital equipment and the communications and data processingmarkets providing the most growth relative to 2003. Our combined revenues inthese two markets increased by 90.4% in the first nine months of 2004 comparedto the first nine months of 2003, while the other two combined marketsincreased 13.6%.

 

We experienced a sequentialdecline from the second quarter of 2004 of 23.7% in our revenue to thesemiconductor capital equipment market. In addition, we expect our revenues inthis market to decline sequentially in the fourth quarter of 2004 as well. Webelieve this is due to reduced demand compared to prior quarters, as well as aninventory correction underway at our customers, which we anticipate to belargely completed within the next one to two quarters. In the third quarter of2004, we also experienced a softening in the communications and data processingmarkets, mainly due to reduced demand from our customers in the wireless basestation and other communication infrastructure, particularly in Asia. Overallour revenues to the communications and data processing market declined sequentiallyin the third quarter of 2004 by 14.6%. These sequential declines were offset byincreased demand from our customers in our industrial and medical market andmilitary and aerospace market which increased 30.7% and 34.5%, respectively.

 

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The overall classification of ourrevenues by market in the first nine months of 2004 was communications and dataprocessing 21.7%, semiconductor capital equipment 28.6%, industrial and medical25.2%, and military and aerospace 24.5%. This compares to the first nine monthsof 2003 classification of communication and data processing 19.7%,semiconductor capital equipment 18.0%, industrial and medical 29.3%, andmilitary and aerospace 33.0%. Over time we expect each of these four markets tocontribute about equally to our revenues.

 

Overall, our revenues bygeographic area for the third quarter of 2004 were 64.5% in North America,18.2% in Europe and 17.3% in Asia, compared to 66.1% in North America, 17.8% inEurope, and 16.1% in Asia during the third quarter of 2003. Our revenues bygeographic area for the first nine months of 2004 were 62.9% in North America,16.4% in Europe, and 20.7% in Asia, compared to 65.8% in North America, 19.9%in Europe, and 14.3% in Asia in the first nine months of 2003. We allocaterevenue geographically based on the location to which we ship our products.

 

Revenues from our higher marginRF products were 48.5% in the third quarter of 2004 compared to 47.7% in thethird quarter of 2003. A significant portion of our RF products are sold intoboth the semiconductor capital equipment market and the military and aerospacemarket. Despite the expected fourth quarter decline in revenues to thesemiconductor capital equipment market, the anticipated increase in revenues toour military and aerospace market is expected to drive the RF portion of ourtotal sales to surpass 50% in the fourth quarter of 2004.

 

*Gross Profit*. Gross margin for the third quarter of 2004 was33.8%, compared to 32.0% in the third quarter of 2003, and 38.0% in the secondquarter of 2004. Excluding acquisition related non-cash amortization of thetechnology assets acquired, gross margin was 35.3% in the third quarter of 2004compared to 34.2% in the third quarter of 2003, and 39.6% in the second quarterof 2004. The improvement in gross profit margin of 110 basis points or 1.1%over the prior year quarter is due to improved fixed cost absorption at bothour Bend, Oregon and Montgomeryville, Pennsylvania facilities, as each of thosefacilities were able to increase revenues on level or only slightly higherproduction spending. The sequential decline in gross margin in the thirdquarter of 2004 was primarily due to $322,000 of write downs recorded forinventory excess and obsolescence, and approximately $240,000 of additionalexpenses associated with the acceleration of production ramp-up for a majorcustomer on a large RF products contract won earlier this year.

 

Gross margin for the first nine months of 2004 was36.0%, compared to 32.0% in the first nine months of 2003. Excludingacquisition related non-cash amortization of the technology assets acquired,gross margin was 37.5% in the first nine months of 2004, compared to 34.3% inthe first nine months of 2003, or an improvement of 320 basis points or 3.2%.The improvement in gross margin in the first nine months of 2004 over the prioryear is due to improved fixed cost absorption at both our Bend, Oregon andMontgomeryville, Pennsylvania facilities, as each of those facilities were ableto increase revenues on level or only slightly higher production spending.

 

*Research and DevelopmentExpense.* Third quarter of 2004 research and development expenseswere $903,000 or 4.8% of revenues, compared to $550,000 in the third quarter of2003, or 4.3% of revenues. Research and development expenses in the first ninemonths of 2004 and 2003 were $2.6 million and $2.1 million or 5.0% and 5.6% ofrevenues, respectively. The dollar increase in both the quarter over quarterand year to date over year to date spending levels on research and developmentare both attributable to increased payroll expense for additional personneldedicated to research and development activities and higher spending onsupplies and materials. The Company plans to continue its research and development programsleading to the introduction of new products for use in both switching and RFapplications. The decrease in R&D spending as a percentage of revenue forthe first nine months of 2004 compared to 2003 is primarily due to our higherrevenue levels in 2004.

 

*Selling, General andAdministrative Expense.* Third quarter of 2004 selling, general, andadministrative expenses were $3.9 million or 20.7% of revenues, compared to$3.7 million in the third quarter of 2003, or 28.9% of revenues, and $5.1million in the second quarter of 2004 or 28.4% of revenues. Selling, general,and administrative expenses in the first nine months of 2004 and 2003 was $13.1million and $11.1 million or 25.3% and 30.4% of revenues, respectively. Theincrease in the year to date over year to date spending levels are primarilyattributable to higher legal costs in connection with a patent litigationmatter. For the first nine months of 2004 and 2003 these legal expenses were$2.0 million and $791,000, respectively. As announced in our press release onJune 16, 2004, the UnitedStates District Court of the Northern District of California has grantedsummary judgment in favor of APT, dismissing IXYS Corporation’s claims ofpatent infringement against APT. The Court held that IXYS’ United States

 

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Patent Nos. 5,486,715 and 5,801,419 are not infringed by APT’s powerMOSFET products, and further held that “IXYS’s patents are invalid becauseobvious.” Key prior art cited by the Court was APT’s own dual metal powerMOSFETs and IGBTs dating from the early 1990s. Therefore we expect our legalcosts will decrease substantially in the second half of 2004. Reference is madeto Part II, Item 1 to this filing for a moredetailed description of this matter. A portion of the year to dateincrease was also due to additional salescommission expense of $360,000 on higher overall revenues and higher payrollcosts of $407,000 relative to the management cash bonus incentive plan.

 

Selling, general andadministrative expenses, other than the IXYS related legal expenses, salescommission expense, and payroll expenses under a variable compensation plan,were $2.9 million in the third quarter of 2004, compared to $2.7 million in thethird quarter of 2003. Selling, general and administrative expenses, other thanthe IXYS related legal expenses, sales commission expense, and payroll expensesunder a variable compensation plan, were $8.8 million in the first nine monthsof 2004, compared to $8.7 million in the first nine months of 2003.

 

*Restructuring Activities:* As part ofmanagement’s cost reduction efforts, the Company announced in November of 2003restructuring actions intended to improve manufacturing efficiencies and loweradministrative costs. The actions include consolidation of certainadministrative functions, rationalization of internal and external assembly andtest manufacturing, and the reduction of rent expense through the purchase andresale of one of the two buildings currently occupied by the Company’s SantaClara, California subsidiary. These announced actions were in addition topreviously disclosed plans to consolidate the Company’s wafer fabrication plantin Montgomeryville, Pennsylvania to Bend, Oregon. Total restructuring relatedcharges recognized in 2003 were $645,000, of which $240,000 was recognized inthe first quarter of 2003 and $405,000 was recognized in the fourth quarter of2003.

 

The total severance relatedcharge recognized in 2003 was $295,000, which was recognized as $240,000 and$55,000 in the first and fourth quarters of 2003, respectively. The severancecharge related to already separated personnel and personnel costs associatedwith benefits expected to be paid upon completion of certain eligible transferactivities. Thebuilding purchase is reported as an asset held for sale and is being marketedfor sale as APT no longer requires the space. In accordance with SFAS 144, anasset held for sale is carried at estimated fair value. As such, APT recordedan impairment charge for the buildingin the fourth quarter of 2003 of approximately $350,000. Fair value wasestimated based on comparable sales data of similar commercial space in thearea. The net carrying value of the building as of September 30, 2004 wasapproximately $1 million and is included as a component of other currentassets.

 

During the first nine months of 2004, an additional$359,000 was recognized for restructuring related charges, of which $206,000was recognized in the first quarter of 2004, $115,000 in the second quarter of2004, and $38,000 in the third quarter of 2004. The total severance relatedcharge recognized in 2004 was $103,000, which was recognized as $65,000 and $38,000 in the first and secondquarters of 2004, respectively. Theseverance charge related to already separated personnel and personnel costsassociated with benefits expected to be paid upon completion of certaineligible transfer activities. Additional restructuring costs of $256,000associated with costs to exit certain production activities were alsorecognized in the first nine months of 2004, of which $141,000 was recognizedin the first quarter of 2004, $77,000 were recognized in the second quarter of2004, and $38,000 was recognized in the third quarter of 2004. These chargesrelate to accelerated depreciation on certain production related equipment tobe abandoned after shutdown and contractual closing costs.

 

*Interest income and o**ther expense, net*. Interest incomeand other expense, net, which includes interest income, interest expense andother expense, was a net loss of $87,000 in the third quarter of 2004 comparedto a net income of $72,000 in the third quarter of 2003. Net interest incomewas $66,000 in the third quarter of 2004 compared to $56,000 in the thirdquarter of 2003. Net interest income for the first nine months of 2004 was$147,000 compared to $164,000 in the first nine months of 2003. Net otherexpense of $147,000 in the first nine months of 2004 includes $181,000 ofexpensed legal and accounting fees associated with the filing and subsequentwithdrawal of the Company’s S-3 registration statement, which was recorded inthe third quarter of 2004. Net other expense for the first nine months of 2003includes $102,000 of an estimated accrued loss related to a small fire at ourMontgomeryville, Pennsylvania facility recorded in the second quarter of 2003.This cost estimate was adjusted in the fourth quarter of 2003 down to $78,000,of which we recovered $48,000 from our insurance coverage, which was recordedas a gain in the fourth quarter of 2003.

 

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*Income Tax Expense (Benefit)*. For the first nine months of 2004, theCompany recorded a tax expense of $57,000, for an effective rate of 2.3%. TheCompany recorded a full valuation allowance against its remaining net deferredtax assets in the fourth quarter of 2003. Inassessing the valuation of deferred tax assets, SFAS No. 109 “Accounting forIncome Taxes,” requires a more likely than not standard. The ultimate realizationof deferred tax assets is dependent on the generation of future domestictaxable income during the periods in which the associated temporary differencesbecome deductible. Management considers the scheduled reversals of deferred taxliabilities, projected future taxable income, and tax planning strategies inmaking this assessment. Although the Company anticipates future long termprofitability, SFAS No. 109 requires that recent historical operatingperformance weigh more heavily in assessing the valuation of deferred taxassets. The more likely than not assessment was principally based upon thelosses generated during 2002 and 2003 and the cyclical nature of the industrywhich make projections of industry trends difficult. While the Company has sufficient netoperating loss carry-forwards (NOL’s) to offset federal taxable income forregular tax purposes, the Company’s use of its NOL’s for alternative minimumtax (AMT) purposes are limited to 90% of its AMT income (AMTI). Therefore, theCompany expects to pay AMT of approximately 20% on the remaining AMTI,resulting in an approximate effective tax rate of 2% for the remainder of 2004.However, at such time the Company is able to determine if it is more likelythan not that it will be able to utilize its net operating losses, the reserveagainst the net deferred tax asset would be reversed.

 

We recorded a tax expense in the third quarter of 2003of $255,000 on a loss before tax of $83,000 for a negative 307% effective taxrate. During the third quarter of 2003 we recorded a non-cash tax expense of$480,000 related to the valuation of the Company’s net deferred tax NOL assetrecognized in the first six months of 2003. In the fourth quarter of 2003 the Company recorded a full valuationallowance against the remaining net deferred tax assets. We recorded thisnon-cash expense in accordance with SFAS 109, “Accounting for Income Taxes”guidance on valuation of deferred tax assets. This expense was partially offsetby a reduction of taxes payable of $225,000 related to the resolution of aprevious tax position. Excluding the $225,000 tax benefit recorded, oureffective tax rate was 0% for the first nine months of 2003.

 

**Liquidity andCapital Resources**

 

Managementassesses the Company’s liquidity in terms of its ability to generate cash tofund its operating, investing, and financing activities. Significant factorsaffecting the management of liquidity are: cash flows from operatingactivities, capital expenditures, investments in businesses, and access to bankcredit when required and at reasonable rates.

 

*OperatingCash Flows:* In the first nine months of2004, we generated approximately $2.6 million from operating activities. Thisresulted from our net income of $2.4 million plus $4.0 million of non-cashcharges for depreciation, amortization, and provisions, which was partiallyoffset by $3.8 million in additional working capital requirements, primarilyhigher trade accounts receivable balances on higher revenues.

 

*Investing Cash Flows:*In the first ninemonths of 2004, we used $3.8 million in investing activities. We invested $2.8million in the purchase of property,plant, and equipment, made net purchases of $810,000 of available-for-salesecurities, and paid $175,000 for an acquisition. The fixed asset additionsrelated to the Bend, Oregon wafer fabrication facility expansion and to theaddition of assembly and test equipment at our Santa Clara, Californiafacility.

 

*Financing Cash Flows:* In the first nine months of 2004, wegenerated approximately $499,000 from financing activities, which primarily consisted ofproceeds from the exercise of stock options.

 

As of September 30, 2004, APT had$35.4 million in working capital. Our trade accounts receivable balance was$11.2 million reflecting a days sales outstanding ratio of 54 days, compared totrade accounts receivable of $7.6 million at December 31, 2003, reflecting adays sales outstanding ratio of 57 days. Based on the geographic mix of ourcustomers and the credit terms we extend, management expects our days salesoutstanding ratio to range from 50 to 60 days. Our inventory balance atSeptember 30, 2004 was $12.8 million reflecting inventory turns of 3.8 timesper year, compared to an inventory balance of $12.4 million at December 31,2003, reflecting inventory turns of 2.7 times per

 

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year. The Company continues to pursue actions tomonitor inventory levels and improve inventory turns. The calculations aboveare based on quarterly average balances of trade accounts receivable andinventory.

 

APT currently expects to fundexpenditures for capital requirements as well as liquidity needs from acombination of available cash balances, internally generated funds andfinancing arrangements if needed. As of September 30, 2004, APT had$16.7 million in cash and cash equivalents and available-for-salesecurities. APT’s investment policy is to invest in short term, high-gradeliquid investments with the goal of capital preservation. APT’s ability togenerate positive cash flow from operations may be affected by marketconditions as well as other risk factors as described in our Annual Report onForm 10-K for the year ended December 31, 2003. We expect from time to time toevaluate potential acquisitions and equity investments complementary to ourmarket strategy. To the extent we pursue such transactions, we could requireadditional equity or debt financing to fund such activities or to fund ourworking capital requirements in the event of an industry downturn or an unexpectedadverse change in our business operations. To the extent we require additionalcapital we cannot be certain that we will be able to obtain such financing onterms favorable to us, or at all.

 

**Off Balance Sheet Arrangements& Commitments**

 

As of September 30, 2004 theCompany did not have any unconsolidated entities or off balance sheet financialarrangements, guarantees or similar commitments with such entities. As ofSeptember 30, 2004 the open value of purchase order commitments was $14.0million compared to $12.5 million at December 31, 2003. This represents theamounts committed per open purchase orders with third parties. The Company didnot enter or terminate any lease agreements during the quarter.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUTMARKET RISK**

 

We do not use derivativefinancial instruments in our investment portfolio. Due to the short durationand conservative nature of our cash equivalents, and the high quality andconservative nature of our long-term investments, we do not expect any materialloss with respect to our investment portfolio.

 

Currently less than 2% of oursales are transacted in local currencies, primarily Euros. As a result, ourinternational results of operations have limited exposure to foreign exchangerate fluctuations. We do not currently hedge against foreign currency rate fluctuations. Most of our export salesand sales by APT Europe are in U.S. dollars, and most of our foreign currencysales are from operations with significant expenses in the same currency. As aresult, gains and losses from such fluctuations have not been material to ourconsolidated results of operations.

 

**ITEM 4. CONTROLS ANDPROCEDURES**

 

(a)                                  *Evaluation ofDisclosure Controls and Procedures*.  Our management, with the participation of ourChief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), carriedout an evaluation of the effectiveness of the Company’s disclosure controls andprocedures as of the end of the period covered by this report pursuant toSecurities Exchange Act Rule 13a-15(e) and 15d-15(e).  Based upon thisevaluation, our CEO and CFO concluded that our controls and procedures areeffective in timely alerting them to material information regarding the Company(including its consolidated subsidiaries) required to be included in ourperiodic SEC filings.

 

(b)                                 *Changes in InternalControls*. There have been no significant changes in our internal controls over financialreporting during the most recent quarter that has materially affected or isreasonably likely to materially affect our internal controls over financialreporting.

 

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**PART II. OTHERINFORMATION**

 

**ITEM 1. LEGALPROCEEDINGS**

 

From time to time the Company isinvolved in various legal matters that arise out of the ordinary conduct of ourbusiness, including those related to litigation over intellectual propertyrights, commercial transactions, contracts, product liability, environmental,safety and health, and employment matters. The Company is not currently involvedin any legal proceedings. The Company accrues loss contingencies in connectionwith its litigation when it is probable that a loss has occurred and the amountof the loss can be reasonably estimated.

 

On August 15, 2002, IXYSCorporation filed a patent infringement lawsuit against APT with the UnitedStates District Court, Northern District of California. The claim filed by IXYSalleges that APT infringes on their United States Patent No. 5,486,715 and5,801,419. The IXYS claim also requested that damages be determined at trialand that such damages be trebled. On June 16, 2004, the United States District Court of the NorthernDistrict of California granted summary judgment in favor of APT, dismissingIXYS Corporation’s claims of patent infringement against APT. The Court held that IXYS’ United States PatentNos. 5,486,715 and 5,801,419 are not infringed by APT’s power MOSFET products.The court found that “APT has proven by clear and convincing evidence that theinventions described in the ‘715 and ‘419 patents would have beencontemporaneously obvious to one skilled in the art.” and further found “ ‘715patent claims 1, 4, 5, 23, 26, 27, and 30 and ‘419 patent claims 1, 5, 6, 8, 9,10, 11, 15, 16, 18, 19, and 20 invalid.” As announced by APT on August 16,2004, APT and IXYS Corporation entered into an agreement and consented to aStipulated Order of Dismissal regarding their patent infringement lawsuit inUnited States District Court in the Northern District of California. Theagreement is a final settlement of all claims in the lawsuit, including APT’spatent infringement claims against IXYS under APT’s United States PatentNos. 5,283,202 and 5,262,336. The parties have agreed to keep the agreementconfidential.

 

**ITEM 6.EXHIBITS**

 

(a) The exhibits filed as part of this report are listed below:

 
| **Exhibit No.** | ** ** | ** **                                                                                                                |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                      |
| 31.1            |       | Rule13a-14(a)/15d-14(a)  Certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.            |
|            |       |                                                                                                                      |
| 31.2            |       | Rule13a-14(a)/15d-14(a)  Certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.            |
|            |       |                                                                                                                      |
| 32              |       | Certification pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURE**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized this 12thday of November, 2004

 

 

 
|   | ADVANCED POWER TECHNOLOGY, INC.                                                                                                    |
|--------|------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                               |
|   |                                                                                                                               |
|   |                                                                                                                               |
|   | By:                                                                                                                                | /s/ GREG M. HAUGEN |   |
|   |                                                                                                                               |
|   | Greg M. Haugen

Vice President, Finance and Administration,

Chief Financial Officer  and Secretary

(Principal Financial Officer) |

 

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